One more thing, velocity of money is a factor of how often money is spent not exchanged! If we MPesa each other back and forth, the overall effect on the velocity is zero. When you spend money - exchange your money for goods or services - then that impacts on the velocity.

Does MPesa make people spend money which would otherwise have been tacked away under a matress?

The formula for calculating velocity of money is

Vt = nT / M

where

Vt is the velocity of money for all transactions.
nT is the nominal value of aggregate transactions.
M is the total amount of money in circulation on average in the economy.

What we need to understand here is that nT represents actual business transactions where money is exchanged for goods and services NOT money being exchanged/transfered between two parties.

The whole point of velocity of money is to compare situations where people have money but don't spend it and where people have the same amount of money and actually spend it - not how fast money is transferred from one point to the other.

So again I ask, does MPesa make people spend money they would otherwise have not spent??? And if it does, to what exent? The MPesa driven expenditure (if any) forms what percentage of total expenditure?

Or those who claim that mobile phones have made people dishonest!

@Maitchblack: Clearly I did not go to the same school of Economics as you did. But I am certainly not the one who should be suing for my money back.

Forget the high sounding formulae and theories for a minute. A part of the answer to your problem can be found in the following statement which you made:

“Does M-Pesa make people spend money which would otherwise have been tacked away under a mattress?”

YES – by reducing inefficiencies in the system, M-peasa does several things:

1. Allows money to change hands more often (almost every time money changes hands goods or services are exchanged which is how an economy grows)
2. By reducing transaction costs, M-pesa allows more money to be moved around
3. M-pesa also allows money to be more efficiently allocated – eg by moving it to rural folks who have a higher propensity to consume.

All this of course assumes an efficient market system, but ours is nothing but. In the meantime, one of the prices we pay is temporary inflation

Let me tell you a story

“A long time ago, before the invention of M-pesa, a young man named Maichblack used to regularly send 3000K to his grandmother in shags. His cucu loves sugar in her tea so she would use the money to buy a kilo or so of the sweet stuff at the local Kiosk (we are keeping things simple here). In return the Kiosk owner, Munene, would order more sugar from the wholesaler at the nearby town.

The whole transaction would on average take about three months. It was unpredictable and quite inefficient and sometimes Maitchblack’s cucu would be forced to do without sugar in her tea.

Maitchblack had a problem. You see the only way he could send money was through Kamau, a tout whose Matatu plies the route to his shags. Sometimes Kamau would drink the money, other times he would demand a 30% percent fee. This was the main reason that Matchblack sent his cucu money every three months or so, although he could have afforded to send more regularly (he still managed to send her 12,000 each year). This in turn affected the Kiosk owner’s sugar orders, which in turn affected the wholesaler, all the way to Kidero’s factory in Mumias (I know, we are keeping it simple here).

Then one day M-pesa was invented. Suddenly Maitch could afford to send his cucu money every month because the transactional risk and cost were reduced. Let us assume he sends exactly the same amount (12,000) as before but this time in tranches of 1000 every month. His cucu is happy now because she can afford to buy sugar regularly. Munene the Kiosk owner is happy too, he now has a regular customer and he can order sugar more regularly from his wholesaler in town - he is actually selling more sugar now but we shall ignore that point. A transaction cycle that used to take 3 months takes one month.

This happy cycle should go all the way to Mumias where the manager will order a change in sugar production to match the new demand cycle, or build additional warehouses to hold buffered stock.

But we have an inefficient market economy. The demand signal will eventually be heard and the market will respond. But that will take time. Meanwhile what you will have is temporary inflation.

In other words Maicthbalck's cucu will have money to buy sugar but Munene will have less sugar to sell because his supplies have not arrived, he will raise the price.

This may look insignificant but consider that M-pesa moves 2 billion shillings a day and you can see the effect is not so mall.

You are very welcome!

@Wakanyugi - As I sign off, I can only refer you to post #14 by @vvs. As @vvs has aptly put it, if MPesa changes expenditure patterns the way you say it does, it should actually reduce the rate of inflation.

I will not repeat what @vvs has said. I'll just add.

If cucu can buy sugar weekly as opposed to monthly or by-monthly, it means that companies can even-out their production thereby reducing warehousing cost, insurance cost and financing costs. Items produced in week one are actully sold in the same week. This reduces the costs mentioned above and also makes money available for week 2's production [or week three - whichever].

Ability of cucu to shop daily/weekly and actually pay for her purchases reduces the capital outlay required, increasing the number of players (kiosk owners) and hence competiton which, guess what? Reduces prices!!! How does it reduce capital outlay? I only need enough for one weeks stock, which I can sell in cash and replenish the stock.

To my knowledge, there is no company that has been unable to keep up with the consumption rate primarily because people are buying weekly instead of monthly or bi-monthly. the shortages we have experienced are because of hoarding or reduced production, NOT frequency of purchase. If the same item were to be bought weekly, fortnightly, monthly or even quarterly, the shortage - leading to inflation - would still be there!

I challenge you, to prove your theory is not purely theoretical, to mention one product that manufucturers couldn't keep up with production pace just because of change of frequncy of purchase without increase in overall demand quantity.

Having said that, I appreciate your views on the matter and the intellectual discourse. We don't have to agree 100% to learn from each other.

@dnn I do agree the diverse views on this thread is astounding. maichblack is an elder thus he knows his stuff and so does Wakanyungi and Drunkard as well. Thank you Wazua for such a forum where we can have an intellectual debate...wanted to get the deal and QW views on this topic as well. As I said from post 1 I agree with maichblack kabisa but I am open minded as I am sure he is but very interesting views!

@MaichBlack

I believe we have beaten this horse enough and ask to sign of too. Before I too, here are the answers to a few of your questions:

1. You challenge me to name a product that has been affected by the change in velocity of money. I already gave the example of sugar prices in the country, a good that used to be a luxury but has rapidly become an inelastic necessity.

2. You insist your cucu buying sugar weekly instead of monthly has no effect on prices - yes it does a) when she used to receive money via an unpredictable schedule she would sometimes forgo sugar (and no, don't argue that she would simply buy more when the money finally arrived) b) change in the purchase cycle has an effect on an industry like sugar production which is in turn dependent on inelastic production factors like weather and fixed plant.

3. There is one reason why Governor Ndungu would ignore the inflation causing effect of a variation in money velocity - the fact that with time the market will adjust to meet the demand occurring out of phase. But it takes time.

4. Finally markets normally respond to signals like demand which in turn are indicated by change in prices - not the other way round. These price changes are not always caused by increased production costs. Sometimes they are caused by a temporary shortage owing to inefficiencies in the demand/supply pipeline. As a result too much money ends up chasing too few goods - in other words, inflation.

P.S. As for that crack about smooth roads causing accidents, they do. It is one of the prices we pay for having good roads - the benefit may ultimately outweigh the price but it does not discount it. Just like we were told, for years, that new technology does not cause loss in jobs. Now economists finally come around to the fact that in fact it does. M-pesa causes temporary inflation, should we therefore do without it it? NO.

Have a good day

Economics 202. I'm in class here, awesome.

@genghis. Deal and QW would cause some very nasty fights on this thread where there are divergent views, hauwajui vizuri. (wazua banter)

Btw its true. When i have cash on mpesa i have a tendency to spend more on airtime than when i don't.

Wakiskia hivyo si watatupa their two cents chap chap. Naona the deal ameandika and I do support point 3 yake, I have fallen victim to that on many occassions. Aguytrying ur two cents?

my head is spinning.. and im horribly lost
but i just beg to ask.. whats the definition of inflation..?

then i ask.. has MPesa increased the goods or the amount of money...?

The only explanation is that Mpesa has probably taken money that was relatively hard to 'reach' from banks and 'banked' it within everybody's reach..
Too much liquid out here..

then again if i have 30K to spend in a month.. and it would take me 5 days to access the 30K as compared to 10days previously..does it mean i can purchase more goods? Its still my 30K

Why didnt this phenomena by MPesa hit during the earlier years?..only now..?

as VV puts it.. the effects of Mpesa should be very minimal to inflation.. unless MPESA agents are creating virtual money..

that brings me to the question.. float or no float.. can MPesa create virtual money..? i can give the guy 4K ask him to 'load' me 8K promising ill pay back the extra 4K immediately the deal goes through.